Incorporating ESG into Optimal Stock Portfolios for the Global Timber & Forestry Industry

This paper investigates how optimal portfolios of timber & forestry stocks perform relative to the global S&P timber & forestry index when corporate social responsibility (CSR) is considered. We incorporate CSR in the construction of optimal portfolios by utilizing combined environmental, social, and governance (ESG) scores. Historical as well as copula-augmented predictive models and ESGconstrained optimization are used to analyze out-of-sample performance of various portfolio strategies over the period 2018-2021. The results of copula-based portfolio strategies are better than of the historical models. Another insight gained by this study is that socially responsible investments in forestry stocks are feasible without sacrificing risk-adjusted returns.